What are the Apartment Loan Requirements in 2019?
What You Need to Qualify for an Apartment Loan
If you’re serious about getting financing to purchase or recapitalize an apartment property, it’s essential to understand what you’ll need to qualify for a loan. While the economy is doing well and apartment loan interest rates are continuing to fall (as of July 2019), multifamily and apartment lenders still require borrowers to prove that they can make their payments, on time and in full. To help you better understand the apartment loan qualification process, we’ve broken down exactly what the average borrower needs to qualify.
Credit Score Requirements
Just as having good credit is important if you want to get a home mortgage, it’s also essential if you want to take out a loan for an apartment property. However, the importance of good credit is more important for some loan types than others. Here’s a list of the general credit requirements for several common types of multifamily loans:
- Bank Loans: 700+
- Fannie Mae Multifamily Loans: 680+ (some flexibility)
- Freddie Mac Multifamily Loans: 650+
- CMBS Loans: 600+
- HUD/FHA Multifamily Loans: 660+
- Life Company Loans: 680+
In general, banks, life companies, agencies, and HUD are quite strict when it comes to credit scores, while CMBS lenders are somewhat more flexible, provided that the borrower is otherwise qualified and the property has a good DSCR (debt service coverage ratio).
Net Worth and Liquidity Requirements
Similar to credit score requirements, net worth and liquidity requirements can vary significantly by loan type. For Fannie Mae and Freddie Mac apartment loans, principals are generally required to have a combined net worth of at least 100% of the total loan amount (not including retirement accounts), and liquidity of 10% of the loan amount post-closing (pre-closing for refinances). Like Fannie and Freddie, banks generally require a borrower to have a net worth of 100% of the loan amount. For CMBS loans, net worth requirements are less present, as the focus is more on the profitability of the target property. However, borrowers should generally have liquidity equal to at least 12 months of principal and interest payments.
HUD/FHA apartment loans have varying net worth requirements, but they are generally closer to Fannie and Freddie than CMBS. Likewise, most non-HUD apartment construction loans require a 1–1 net-worth-to-loan-size ratio, though some lenders are willing to provide construction financing to borrowers with a net worth of only 75% of the total loan amount. Liquidity requirements for these loans vary.
Borrower net worth is usually demonstrated to lenders through a personal financial statement (PFS), a document which includes basic borrower information and a comprehensive analysis of a borrower’s assets and liabilities. It should also be noted that if a borrower currently owns other investment properties, they will also need to submit a Schedule of Real Estate Owned (SREO), a document detailing the debt, equity, and cash flow of each property the borrower has an ownership interest in.
DSCR (Debt Service Coverage Ratio)
When determining whether to approve a prospective borrower for an apartment loan, lenders will look at a property’s debt service coverage ratio or DSCR. This ratio compares the property’s net operating income (NOI) to its debt service. If a property has a DSCR of 1 or more, it is generating enough income to pay off its debts, while if it has a DSCR of less than 1, it is actually losing money. For instance, if a property had an annual income of $1 million, but paid $800,000 in mortgage payments, it would have a DSCR of 1.25x, while if it had an annual income of $1 million, but paid $1.1 million in mortgage payments, it would have a DSCR of 0.9x. Generally, lenders require a property to have a minimum DSCR of at least 1.20–1.25x, in order to make sure that there is a reasonable margin of safety, should vacancies increase or unexpected expenses occur.
LTV (Loan to Value Ratio)
In addition to DSCR, LTV is another essential metric when it comes to qualifying for multifamily financing. LTV is determined by taking the loan amount and dividing it by the current market value of the subject property. For instance, a $750,000 loan on a property worth $1 million would be a 75% LTV loan. Maximum LTV allowances vary by loan type; HUD/FHA apartment loans often go up to 85%, Fannie and Freddie often go up to 80%, while banks and CMBS lenders generally top out around 75%. Life companies are the most conservative, with most loans offered around 55–60% LTV, with some loans trending up to 70–75% for extremely high-credit borrowers.
Application Fees and Third-Party Reports
In order to be fully approved for apartment financing, borrowers will often need to put down a significant amount of money upfront in the form of application fees, legal fees, and third-party reports, such as appraisals, environmental and engineering reports, and the like. Applications fees vary significantly by loan type; for instance, Fannie Mae apartment loans typically require between $10,000 and $20,000 in application fees, while Freddie Mac multifamily loans usually require between $2,000 and $8,000 in fees. CMBS loans often require $5,000 to $15,000 in fees, while HUD/FHA apartment loan application fees are even pricier, at $25,000.
However, application fees aren’t the only application cost; legal fees can also be quite expensive. For many agency loans, legal fees can be in the $8,000 to $12,000 range, while, for CMBS financing, legal fees generally start around $15,000. Legal fees are more variable for HUD/FHA and bank financing, but can still be pricey. Finally, borrowers should be aware that third-party report costs can also add up. Appraisals and title reports are always required, and in most cases, environmental reports and engineering reports will be required as well. Prices vary based on property size, location, and other factors, but the combined cost of these reports can easily add up to several thousand dollars.
Apartment Ownership Experience
Apartment ownership and or management experience is more important for some types of loans than others. In general, HUD, Fannie and Freddie, and life companies generally require a decent degree of experience, while CMBS lenders are somewhat less strict, caring more about the profitability of the subject property itself.
